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Will High-Income People Work Less if the High-Income Tax Cuts Expire?

November 30, 2012 at 4:42 PM

BY

Chye-Ching Huang

Senate Minority Leader Mitch McConnell (R-KY) claimed yesterday that allowing the top two income tax rates to rise to Clinton-era levels would harm the economy by discouraging high-income taxpayers from working. “Rates matter because they affect behavior. The higher the tax rate, the higher the disincentive to work,” he said. This ignores the fact that the economy and jobs grew more strongly after the Clinton tax increases than after the Bush tax cuts. Moreover:

“Overall, evidence suggests [high-income Americans’] labor supply is insensitive to tax rates,” tax expert Len Burman has told Congress. As we explained in a recent report, raising marginal tax rates may encourage some high-income taxpayers to work less because they will keep less of each dollar they earn. But others will choose to work more, in order to make as much money after taxes as they did before the tax increase. The evidence suggests that for high-income taxpayers, these two opposing responses largely cancel each other out.

Moderate- and low-income workers are much more responsive to changes in tax rates than are workers at the top. The top 40 percent of income earners would change their work hours by less than one-fifth as much, in response to a change in tax rates, as would the bottom 10 percent of income earners, according to Congressional Budget Office estimates.

Over ten years, letting those high-end tax cuts expire also would also shrink deficits by nearly $1 trillion over ten years, boosting national saving, private investment, and long-term economic growth.

See our blog series and report for more on the economic effects of raising the top tax rates.